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Tilting at Windmills

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June 10, 2007
By: Kevin Drum

CONVENIENT ARGUMENTS....Daniel Gross writes in the New York Times about growing income inequality:

Two professors — Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California, Berkeley — have found that the share of gross personal income of the top 1 percent of American earners rose to 17.4 percent in 2005 from 8.2 percent in 1980.

....Public policies have played a significant role in contributing to the growth of income inequality. That's the argument made in a recent, brilliant National Bureau of Economic Research working paper by Professor [Frank] Levy and Peter Temin....[Since 1980] unions have weakened, the minimum wage hasn't come close to keeping up with inflation, and marginal income tax rates have been cut — the top marginal rate is now 36 percent, down from 70 percent in 1980. A result has been declining bargaining power for workers and the rise of a winner-take-all environment.

....It is commonplace to hear that the current set of arrangements and policies is the only possible way the economy can work, given trends like the rise of China and global economic integration. As Professor Levy said, "That's a very convenient argument for people to make if they're doing very well."

On a related noted, today the LA Times prints this year's list of the 100 highest paid executives in California. For the first time ever they've started listing CEO pay as a percentage of total corporate profits. Why? Because CEO pay has finally gotten so out of hand that shareholders are starting to notice that it's making a serious dent in earnings all by itself. Just think what they'd find out if they took at look at the top dozen executives instead of just the CEO.

Kevin Drum 1:06 PM Permalink | Trackbacks | Comments (79)

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Comments

I wonder what has taken corporate shareholders so long. Has it been the "retirement" packages given to guys like Lee Raymond that finally woke these people up?

Posted by: Joe Klein's conscience on June 10, 2007 at 1:11 PM | PERMALINK

As long as no gay people get married, I don't care how poor I am. Or something.

Posted by: craigie on June 10, 2007 at 1:12 PM | PERMALINK

Well, that 70% rate on the top earners in 1980 is an argument we can't and shouldn't try to win. That rate is insane, and unfair IMO.

Posted by: Chris on June 10, 2007 at 1:16 PM | PERMALINK

"As Professor Levy said, "That's a very convenient argument for people to make if they're doing very well.""

And frequently said people are economists suckling at the public teat (Levy being an exception in two ways).

Posted by: Fred on June 10, 2007 at 1:22 PM | PERMALINK

Chris - Problem is, how much is actually paid at any of those rates anymore, considering a lot of the income in those top brackets isn't actual 'earned' income, but gained through dividends and such. And with taxes on dividends stripped, those taxes have dropped even more significantly.

Posted by: Kryptik on June 10, 2007 at 1:28 PM | PERMALINK

Look at the snotty FU snark in George's Will's latest Tory finger-giving to the common folk, http://jewishworldreview.com/cols/will061107.php3
(that's what Drudge linked to.)

Chris: You are right, the 70% should not be brought back. We can, however, bring the cap gains rate up with earned income, cap the deductibility of income as an expense (as Clinton/Gore did, or at least, tried to) while uncapping the income for SSN taxation, institute a progressive corporate income tax (higher profit % means higher tax %, after deduction to protect small business), etc.

tyrannogenius

Posted by: Neil B. on June 10, 2007 at 1:30 PM | PERMALINK

Also, the percentages are just for firms that are profitable. That leaves out big money-losers like Ford, where Mulally pulled down $28M for the first 4 months. Obviously he's new on the job, but shouldn't the big bonuses wait until after he turns the company around?

Posted by: Fred on June 10, 2007 at 1:33 PM | PERMALINK

Making CEOs justify their pay is spitting upon all the people that died on 9/11.

Posted by: Al on June 10, 2007 at 1:34 PM | PERMALINK

Al--that is a senseless non-sequitor. You need to get out and enjoy the sunshine.

Posted by: consider wisely always on June 10, 2007 at 1:44 PM | PERMALINK

Hi Kevin,

"In the past year, food prices have increased 3.7 percent and are on track to jump by as much as 7 percent by year's end. The current increase is more than double the 1.8 percent jump seen the year before, according to the consumer price index.

...Prices are rising in each grocery aisle. In April, eggs cost 18.6 percent more than a year ago. Whole chicken prices increased 7 percent. Bread is up nearly 6 percent and beef steaks up 5.5 percent." (Source)

Meanwhile, Ezra Klein is blogging about George Will, who wrote:
"How do you exclaim, as Hillary Clinton does, that today's economy is "like going back to the era of the robber barons" and insist that the nation urgently needs substantial tax increases, in the face of these facts:

In the 102 quarters since Ronald Reagan's tax cuts went into effect more than 25 years ago, there have been 96 quarters of growth. Since the Bush tax cuts and the current expansion began, the economy's growth has averaged 3 percent per quarter, and more than 8 million jobs have been created. The deficit as a percentage of gross domestic product is below the post-World War II average."

Umm...because people have to eat, George. No problem for the robber-barons with their pay rises, but what about us small folks?

Regards, C

Posted by: Cernig on June 10, 2007 at 1:48 PM | PERMALINK

Uh, Al, your talking point generator selection wheel is accidently set on "random--non sequitur." Please reset, immediately!

Your Overlords.

Making CEOs justify their pay is spitting upon all the people that died on 9/11.

Posted by: Trollhattan on June 10, 2007 at 1:49 PM | PERMALINK

Just think what they'd find out if they took at look at the top dozen executives instead of just the CEO.

They'd probably find it's about 10%, trending upwards, with up to a quarter of that the CEO. Can't recall where I saw it, but that was the estimate given in a recent comparison of executive compensation at public and private companies (specifically, private equity deals).

Posted by: has407 on June 10, 2007 at 1:49 PM | PERMALINK

i read gross' article this morning. as i was reading the center part about education and its rewards i keep thinking about people who make unusually high incomes.

and wondering just how much of income disparity they account for.

it's not just corporate bigwigs.

alex rodriquez gets some good pesos for his work,

the red sox's new japanese pitcher (whose name i can't recalll and don't want to take the time to look up) got a nice chunk of yen for throwing the speheroid.

atlanta quaterback michael vick,

lakers "star" kobe bryant,

get good, real good, paychecks,

as do hundreds of other baseball, football, basketball athletes.

and i would guess the initial large paychecks keep on giving for the rest of the highly paid person's life.

micheal jackson has been out of professioanl sports for several years but he is probably, if anything, richer now than when he was playing.

so

we have the ceo's, e.g., welch, gross, nardelli,

we have the sports stars,

we have the actors,

we have the hedge fund investors and the goldman-sachs partners,

who else?

i would like to know if there are enough of these extremely highly paid individuals and

if their collective pay is large enough,

to effect the income statistics.

certainly,

education does not seem likely to have had much of an impact in these categories.

Posted by: orionATL on June 10, 2007 at 2:04 PM | PERMALINK

Paris Hilton is a walking argument for the estate tax.

If we don't get control of the wealth inequality problem we are going to wake up in the middle of a social readjustment just like the social readjustment that happened in France in the later part of the 18th century and in Russia both in the early and late parts of the 20th century.

When an educated society becomes sufficiently out of economic balance big trouble for the folks at the top is not far away.

Posted by: Ron Byers on June 10, 2007 at 2:05 PM | PERMALINK

. As Professor Levy said, "That's a very convenient argument for people to make if they're doing very well."

Xenophanes the pre-Socratic used to say that if horses and cattle had hands, so that they could make statues of their gods, the images would have hooves and horns.

Posted by: Davis X. Machina on June 10, 2007 at 2:10 PM | PERMALINK

p.s. The reference for my previous post: Deliver and you get paid, The Deal, June 4 2007 (subscription required).

Posted by: has407 on June 10, 2007 at 2:11 PM | PERMALINK

Wealth has been increasingly receding first from the working class, then the skilled working middle-class, lately the upper-middle class white-collar workers. Just like a big kudzu vine that chokes out all the smaller plants.

Posted by: Doc at the Radar Station on June 10, 2007 at 2:12 PM | PERMALINK

I don't care about any of that stuff as long as I make enough to pay the cable bill, so I can watch American Idol. Besides, actually doing anything about it would immediately be attacked by the punditry as "class warfare," and the pundits are wise and know things about these things.

Posted by: Martin Gale on June 10, 2007 at 2:17 PM | PERMALINK

Leave it to the liberals to recommend that the fruits of the labor of the working class go to the least productive members of the society.

I say we should double both the magnitude of the income and wealth inequality and the number of Gitmos. That will lead to further economic growth that will double the wealth inequality yet again. All for the common good.

Posted by: gregor on June 10, 2007 at 2:19 PM | PERMALINK

"Leave it to the liberals to recommend that the fruits of the labor of the working class go to the least productive members of the society."

Umm, we're recommending the exact opposite - that the fruits of the labor of the working class *shouldn't* go to the least productive members of the society - the CEOs.

Reading comprehension is a must in today's world, and you need to brush up.


Posted by: OhNoNotAgain on June 10, 2007 at 2:37 PM | PERMALINK

The incentive effects of multi-million dollar compensation packages for top corporate executives are likely to be pernicious. It isn't just that shareholders might fear that the CEO is taking more than his fair share. The incentive structure at the top of a large business corporation is built up as a tournament, and making the CEO's compensation so large, carries the danger of so raising the stakes in that tournament, that the only ones, who survive to win, are ruthless and unethical. Moreover, at these rates of compensation, only a year or two or three at the top is necessary to establish independent wealth -- with the sharks circling and untrustworthy, a CEO has an incentive to pursue the most expedient policies for his own enrichment, on the shortest term. Not a formula for preserving long-term shareholder value.

Posted by: Bruce Wilder on June 10, 2007 at 2:53 PM | PERMALINK

"-- with the sharks circling and untrustworthy, a CEO has an incentive to pursue the most expedient policies for his own enrichment, on the shortest term. Not a formula for preserving long-term shareholder value."
Posted by: Bruce Wilder on June 10, 2007 at 2:53 PM

Also, not a formula for preserving *long-term investment* that will create any future wealth for *anybody*.

Posted by: Doc at the Radar Station on June 10, 2007 at 3:10 PM | PERMALINK

"Reading comprehension is a must in today's world, and you need to brush up."
Posted by: OhNoNotAgain on June 10, 2007 at 2:37 PM

And recognition of the sardonic is an intrinsic part of reading comprehension, Mr. Ohno. Actually Jonathon Swift really didn't advocate eating Irish babies.

Posted by: El Pollo on June 10, 2007 at 3:26 PM | PERMALINK

By paying extremely high compensations, you don't get the best, you just get the greediest.

Posted by: Jörgen in Germany on June 10, 2007 at 3:32 PM | PERMALINK

"...since Ronald Reagan's tax cuts went into effect more than 25 years ago, there have been 96 quarters of growth.... blah... the economy's growth has averaged 3 percent per quarter... blah"

There's a part that the economists don't like to talk about.

This economic 'growth' is mostly based on 'funny money', currency literally conjured up without the backing of 'real' goods behind it.

AKA our current 'finance economy'. Over the short term, it works great. But someday you run out of people willing to accept imaginary dollars as currency. Coming soon to a bank near you.

Posted by: Buford on June 10, 2007 at 3:46 PM | PERMALINK

Anybody who thinks the tax code of 1980 would produce better living standards for median wage earners or poor people than is the case today is nuts, but I don't think many people actually buy into that nonsense, which makes it curious that this study would imply that the 1980 tax code was better in some regard. Now, there probably could be much done to the tax code which would provide a better environment for median wage earners particularly, but it would start with cutting FICA taxes for such folks, which is not likely to get much support from incumbents of any stripe.

I wish Al Gore would run again for that reason alone; swapping carbon taxes for FICA taxes would help median wage earners in a lot of places, although certainly not all, at least not right away, and it would have the added benefit of beginning to spur needed technology development in the least wasteful and most productive manner.

Posted by: Will Allen on June 10, 2007 at 3:46 PM | PERMALINK

The Good, the Bad, and the Lucky:
CEO Pay and Skill
Robert Daines, Vinay B. Nair, Lewis Kornhauser
2005

"Compensation and Incentives: Practice vs. Theory," George P. Baker, Michael C. Jensen, and Kevin J. Murphy, Journal of Finance, 1988, 63:3, pp. 593-616

"Are CEOs Rewarded for Luck? The Ones Without Principles Are," Marianne Bertrand and Sendhil Mullainathan, Quarterly Journal of Economics, 2001, pp. 901-932

Strategic Leadership: Top Executives and Their Effects on Organizations, Sydney Finkelstein and Donald C. Hambrick, South-Western: 1996

Posted by: consider wisely always on June 10, 2007 at 3:52 PM | PERMALINK

"Actually Jonathon Swift really didn't advocate eating Irish babies."
Posted by: El Pollo on June 10, 2007 at 3:26 PM

irony-mode = on

What did he have against Irish babies. If America's rich can eat babies, then why didn't he think it was right to eat Irish babies. Can't the Rich (regardless of that quaint idea of 'nationality') do whatever the Hell they want these days?

C'mon, these are Conservative days (we have been told and must obey), eat eat eat 'til ya explode with wealth. They say it's Patriotic too.

After all, why should the Rich care if they take ALL the wealth. It's not like they have to worry about who else having problems buying food, to feed their bodies, so they will have the energy to go and work in the companies owned by ... the Rich. Hmmm, seems to be a wicked connection there.

Maybe...just maybe there's a connection which should be recognized. Maybe...just maybe there IS a need to pay employees instead of just lashing them to the desk and whipping them into subservience. Maybe...just maybe it would be a good thing to pay them well.

I'm just sayin'...maybe.

Posted by: MarkH on June 10, 2007 at 3:55 PM | PERMALINK

Thank goodness we have the AFL-CIO:

"The average CEO of a Standard & Poor's 500 company received $14.78 million in total compensation, according to a preliminary analysis by The Corporate Library. This represents a 9.4 percent increase in CEO pay over 2005.[1]

A reasonable and fair compensation system for executives and workers is fundamental to the creation of long-term corporate value. However, the past two decades have seen an unprecedented growth in compensation for top executives and a dramatic increase in the ratio between the compensation of executives and their employees.

Boards of directors are responsible for setting CEO pay. Too often, directors award compensation packages that go well beyond what is required to attract and retain executives and reward even poorly performing CEOs. These executive pay excesses come at the expense of shareholders as well as the company and its employees.

Excessive CEO pay takes dollars out of the pockets of shareholders—including the retirement savings of America’s working families. Moreover, a poorly designed executive compensation package can reward decisions that are not in the long-term interests of a company, its shareholders and employees.

Some CEOs may have far greater control over their pay than anybody previously suspected. The past year has witnessed a stock options backdating scandal that has resulted in U.S. Securities and Exchange Commission (SEC) investigations at as many as 160 companies[2] and the departure of many CEOs, such as William McGuire of UnitedHealth Group.

Also in 2006, departing CEOs Henry McKinnell of Pfizer and Robert Nardelli of Home Depot both received exit packages of more than $200 million.[3] Both companies underperformed during their tenures, although their excessive pay was an issue in itself.

In some cases, CEOs were entitled to receive generous exit packages, despite their involvement in the stock options backdating scandal. Former CEO Bruce Karatz departed because of options backdating at KB Home, but because he retired and was not fired for cause, the terms of his employment agreement entitled him to an exit package worth as much as $175 million.[4]

Karatz’s compensation is frozen until an agreement is reached between him and KB Home on how much he will actually receive.[5] Investors have urged the company not to pay Karatz. However, because of the legally binding employment agreement, KB Home has a weakened case if it decides not to pay him

Excessive CEO pay is fundamentally a corporate governance problem. The board of directors is supposed to protect shareholder interests and ensure that CEO pay reflects performance. However, at approximately two-thirds of companies, the CEO also chairs the board. When a single person serves as both chair and CEO, it is impossible to objectively monitor and evaluate his or her own performance.

CEOs also dominate the election of directors. The vast majority of directors are hand picked by incumbent management. Because of the proxy rules, it is prohibitively expensive for long-term shareholders to run their own director candidates. Moreover, even if a majority of shareholders withhold support from directors, they still are elected to the board at many companies.

Ultimately, shareholders have to be able to trust their boards of directors to set responsible CEO pay packages. For this reason, CEO pay will be reformed only when corporate boards become more accountable. Until then, CEOs will continue to influence the size and form of their own compensation, and CEO pay will continue to rise.

The good news is that investors may finally get the tools needed to make boards of directors more accountable. Last year, a historic court decision at American International Group ruled that shareholders have the right to reform the way that directors are nominated for election.

The business community has been pushing the SEC to undo this decision through regulatory action. Hopefully the SEC will resist this pressure and ensure the protection and expansion of long-term shareholders’ rights to participate in corporate board elections."


Posted by: consider wisely always on June 10, 2007 at 4:03 PM | PERMALINK

And very few of those top earners are even paying anything like 36% income taxes.

Our tax system is utterly unenforceable. We allow deferrals of income tax while companies are profitable; and then when the tax is due, the companies are unprofitable and can't pay.
Then you have all these "pass-thru" entities, so that losses (mostly paper losses, not economic losses) can be moved around to offset any income; and if the IRS finds something wrong, they have to spend forever tracking down all the different layers of investors/partners. In the end very little tax is collected. Or in the case of NOLs, the IRS gets to audit up to 15 years worth of losses. How effective do you think an audit of a company's last 15 years of operations is going to be?
Now you also have these bogus credits, like the R&D credit, where companies claim almost all of their expenses are related to R&D, and they get their tax bills whittled down to nothing. Huge companies claiming hundreds of millions of tax dollars apiece, and there is absolutely no public oversight. When IRS Exam makes adjustments, IRS Appeals gives away almost all of them, so there is no disincentive not to be as brazen as possible. And there is a dirty revolving door between Appeals Officers and the companies that come before Appeals. Often AOs retire and go to work for companies they just conceded hundreds of millions, sometimes billions, of dollars of exam adjustments a few years earlier.

The solution is to tax income when it is earned, and tax it on the entity that earns it, even partnerships. Disallow all losses and credits (except withholding credits and AMT credit) to get rid of all the monkey business. No carryforwards or carrybacks. No deductions for capital losses (that's the trade off for the low capital gain tax rate. You could, and probably should allow limited ordinary losses against ordinary income). Alternative minimum tax would be based on 90% of the financial statement income. You could also make so-called double taxation optional. Let's say the top tax rate was 36%. So you set two tax rates, one for capital gains, and one for ordinary income (to include dividends, interest partnership distributions, etc). Corporations and limited partnerships would pay income tax of 20%. They would get a tax deduction for all dividends paid out of current year earnings and profits, so if they paid out all of their current E&P, they would have no tax. The dividend would be ordinary income to the investor and taxed at 36%. Dividends paid out of prior year E&P would be taxed to the shareholder or ltd ptr at 20%. Either way, the company would be required to withhold taxes on the dividends at the applicable rates. Effectively the tax rate would be the same (20% applied twice equals 36%, or 80% x 80% = 64%), but the investor would get to defer some of the taxes by leaving their money invested in the company.

Of course anyone in power will say how "unfair" this scheme is, but they mostly have vested interests in keeping tax administration unworkable and as complex as possible. What's unfair is that the only ones in this country who pay taxes are honest people (and sometimes not even them, eh Arriana?). This scheme lowers tax rates, equalizes all businesses, eliminates double taxation (it has optional double taxation, but the effect of it is the same as single taxation).

It would eliminate the dividends rec'd deduction for corporations, but they would get the dividends paid deduction, and that would put all business entities on an equal tax footing. If a company rec'd a dividend or distribution it did not want to pay tax on, it could simply pass the dividend out to it's own investors. Take out all the tax advantages and tax disadvantages of the various forms of business, and voila, hundreds of thousands of partnerships, corporations and S corporations with no legitimate business purpose besides tax avoidance would disappear overnight.

Someone will scream some sort of bullshit (Al?) that not allowing capital losses will end liquidity in the markets. I don't buy it, and I'd have to see proof of that. It would put and end to specualtion, and be a big damper on all these asset bubles we keeps seeing, which I think would be a very healthy thing. Rewarding risk takers, that business school mantra, is one thing. But rewarding irresponsible business practices that lose money for investors is not good policy, and taking away that reward for losing money is not going to slow down real risk takers anyway. Allowing losses against unrelated income is just a prescription for out of control tax fraud.

The only part I haven't worked out is general partnerships. Allowing limited ordinary losses against other ordinary income for a general partner might be OK, but not to the extent that their "basis" is from recourse and nonrecourse debt that they have not and possibly will not ever pay. So what's that, 3 or 4 steps, and taxes get infinitely fairer and easier to adminster? Of course CPAs (90% liars) and tax lawyers (99% liars) would take it in the shorts. Which is why I like it so much.

Posted by: jussumbody on June 10, 2007 at 4:11 PM | PERMALINK

We've spent the years since the dotcom bust living off of Mortgage Equity Withdrawals:
http://bigpicture.typepad.com/comments/2005/12/chart_of_the_we.html
http://calculatedrisk.blogspot.com/2006/09/gdp-growth-with-and-without-mortgage.html

Now that is starting to tap out. What's next? I wonder how much money people have been borrowing from their retirement? What about people *cashing out* retirement when they lose higher-paying jobs? Anybody got any data about that? If this is a big deal-then what comes after that? I think we are wringing the last bit of water out of a long-term wet towel.

Posted by: Doc at the Radar Station on June 10, 2007 at 4:20 PM | PERMALINK

Doc is absolutely right on the mortgage refinancing issue--a lot of people likely owe more than their houses are worth. Dire numbers of them.

Posted by: consider wisely always on June 10, 2007 at 4:34 PM | PERMALINK

Doc is absolutely right on the mortgage refinancing issue--a lot of people likely owe more than their houses are worth. Dire numbers of them.

Posted by: consider wisely always on June 10, 2007 at 4:35 PM | PERMALINK
Anybody who thinks the tax code of 1980 would produce better living standards.... swapping carbon taxes for FICA taxes would help...Will Allen at 3:46 PM
Anyone who thinks that the pre-Reagan tax code would not have a leveling effect is nuts. The tax code as discussed was not about increasing the bottom, but lowering the top and reducing inequality. Anyone who doesn't understand that the FICA tax pays a separate government program and has therefor nothing to do with a proposed carbon tax isn't firing on all cylinders. Posted by: Mike on June 10, 2007 at 5:08 PM | PERMALINK

Will Allen: Anybody who thinks the tax code of 1980 would produce better living standards for median wage earners or poor people than is the case today is nuts, but I don't think many people actually buy into that nonsense, which makes it curious that this study would imply that the 1980 tax code was better in some regard.

Overall: (1) median income, as well as income in all quintiles, has increased (albeit relatively small increases), and in that respect the standard of living has improved; (2) GDP has increased; and (3) productivity has increased. However, that's not what the study addresses.

The question Levy and Temin address is income inequality. With respect to the 1980 tax code change, as stated in their paper:

Many of Reagan’s supporters acknowledged his policies would lead to inequality, but they argued that inequality was the price of revived productivity growth. Most people would see rising incomes while the incomes of the rich would rise faster.

...Because a rising tide was supposed to lift all boats, there was no thought given to ex-post redistribution. To the contrary, Reagan’s administration allowed the minimum wage to reach an historical low relative to output per worker

In short, Levy and Temin only suggest that the 1980 tax code change has contributed significantly to income inequality. Whether you believe that, and subsequent changes that favor capital, are key to productivity growth, and that income inequality is the inevitable price, is another matter. Levy and Temin are pretty clear that they don't believe that to be true, and sound a clear warning; from their conclusion:
The last six years of federal tax history have involved an inhospitable politics in which winners have used their political power to expand their winnings. But political sentiment does shift. Economic distress like the 1930s can induce such a shift. Even the smaller economic distress of the 1970s was enough to redirect American economic policy. Only time will tell if more economic distress is needed to change policy yet again.

Posted by: has407 on June 10, 2007 at 5:11 PM | PERMALINK

p.s. It's also important to note that tax policy is only one of several potentially significant contributors to income inequality that Levy and Temin identify. Tax policy is an easily identifiable and grasped lever; while it may be necessary, it is not sufficient.

Posted by: has407 on June 10, 2007 at 5:37 PM | PERMALINK

Ah, Kevin.

Still carrying water for the class warfare people, eh?

Let's see, over the last 25 years, as you say, the top 1 percent of Americans saw their wages increase from 8.2 percent per year to 17.4%. According to my math, that's an increase of .368 percentage points a year. pretty small beer Kevin.

But I guess even the smallest good fortune that accruse to the rich causes the huing cry to ring out from the looney libs.

The rest of us will concentrate on the war effort, thanks.

Posted by: egbert on June 10, 2007 at 6:41 PM | PERMALINK

On such a gorgeous summer weekend (weather-wise), it's hard even for a cycnic like me not to be optimistic. The accounting profession is also putting in place rules for greater disclosure of executive compensation in proxy statements and restrictions on directors serving on both compensation and executive committees of boards of directors. Maybe Americans are finally going to reject the piracy that has gone on since the Reagan Administration and start jailing a few more CEOs for the egregious theft of shareholder wealth that has gone on. God bless America.

Posted by: The Conservative Deflator on June 10, 2007 at 6:52 PM | PERMALINK

If CEO pay were tied to corporate profits, it would mean that small start-up companies couldn't compete for the best managerial talent, who would simply go work for large established profitable companies. Those of us who aspire to the top jobs do not begrudge those who have already reached the summit.

Posted by: Al on June 10, 2007 at 6:53 PM | PERMALINK

you would think that george will would bother to note that since the original reagan tax cuts, reagan himself raised taxes on either five or six separate occasions (can't recall now), bush i raised taxes, and clinton raised taxes.

we could also note that since the clinton tax hike, we've had 53 quarters with 2 of them in recession if we want to play the will game.

and anyone who claims that the unified deficit is an honest portrayal of the deficit as will is trying to do is simply a liar.

Posted by: howard on June 10, 2007 at 7:09 PM | PERMALINK

you would think that george will would bother to note that since the original reagan tax cuts, reagan himself raised taxes on either five or six separate occasions (can't recall now), bush i raised taxes, and clinton raised taxes.

we could also note that since the clinton tax hike, we've had 53 quarters with 2 of them in recession if we want to play the will game.

and anyone who claims that the unified deficit is an honest portrayal of the deficit as will is trying to do is simply a liar.

Posted by: howard on June 10, 2007 at 7:10 PM | PERMALINK

One reason why it's taken shareholders so long to notice CEO pay is shareholders hold about as much power in companies now as as voters did in East Germany.

One public policy action which often gets overlooked when people start talking about income inequality but which I believe has been crucial has been the role of the Fed during all of this. Time and time again over the years, the Fed would, under Greenspan at least (I can't remember how it acted under Volker and haven't paid as much attention since Greenspan retired) has been the Fed has hiked interest rates to slow down the economy whenever wages started to move up too much but it has dropped interest rates whenever the markets started to decline too much. I can't imagine that these actions haven't played an enormous role in dampening wages while at the same time increasing the wealth of anyone relying on investments.

Posted by: Guscat on June 10, 2007 at 7:47 PM | PERMALINK

Let's see, over the last 25 years, as you say, the top 1 percent of Americans saw their wages increase from 8.2 percent per year to 17.4%.

No, for the top 1% 1980-2005:

  • personal income rose 8.2% to 17.4%
  • wage and salary income rose 6.4% to 11.6%
  • and took 80% of all income gains
According to my math, that's an increase of .368 percentage points a year.

Your math is wrong--the annual increase over the period is not simply the difference divided by the period (you have heard of compounding?). Given another few years on our present trajectory, and the share of income gain accruing to the top 1% will be 100%.

Posted by: has407 on June 10, 2007 at 7:55 PM | PERMALINK

Has407:

Welcome to the short-lived Age of the Corporate States.

Posted by: slanted tom on June 10, 2007 at 8:09 PM | PERMALINK

has407 -

Not surprising your liberal math is wrong. By the way, yeah I heard of compouding, and it has to do with interest. You are conflating wage increases with interest rates.

Posted by: egbert on June 10, 2007 at 8:11 PM | PERMALINK

jeez, if we ever needed definitive evidence of just how much of an idiot egbert is, he gave it to us at 8:11. in the immortal words of bugs bunny, what a marooooon.

Posted by: howard on June 10, 2007 at 8:28 PM | PERMALINK

I would be interested to know how gross personal wealth is distributed, as opposed to gross personal income. Wealth is generally a much better measure of how well one is doing than income.

It also would be a much better basis for taxation, IMO. By far the two largest expenses of the federal government are national defense and debt payments. (Social security and medicare are just debt payments, to people who paid into them all their lives.) National defense is all about defending our wealth--not our income. And surely debt payments should be primarily the resposibility of those who aquired their money while the government aquired the debt.

Posted by: Kyle McCullough on June 10, 2007 at 9:08 PM | PERMALINK

kyle, because i'm at home and not at my office, i don't have all my handy bookmarks and cites, but i can tell you a couple of things about wealth distribution that i remember offhand.

first, i read in barron's a few weeks ago that the upper 1 percent of households by wealth own 30% of the assets and 7% of the debts.

second, exclusive of primary residence, something like 2% of households are worth north of $1M; inclusive, it's somewhere between 4 and 5%. fwiw, my household (just barely) falls into that first category, and i can tell you that we aren't wealthy by the standards of real wealth in america, although, of course, obviously by "normal" standards we are.

Posted by: howard on June 10, 2007 at 10:00 PM | PERMALINK

Did the income gap increase between 1993 and 2001? If so, John Edwards has powerful ammunition to show why Hillary shouldn't be nominated -- and let's hope he uses it.

Posted by: Vincent on June 10, 2007 at 10:17 PM | PERMALINK

Vincent, the situation during the '90s is a little complicated (and again, as i noted, i don't have access to all my bookmarks right now): on the one hand, income to the upper 1% did increase; on the other hand, real incomes went up across all levels of household.

which is to say, we did have the classic rising tide lifting all boats (and we also had the clinton administration doing two important things: increasing the coverage of the ETIC and making college loans easier to come by), but the concentration of income didn't halt.

Posted by: howard on June 10, 2007 at 11:14 PM | PERMALINK

I'm confused, remind me again. Why should I care? I am either doing fine or not -- what does it matter that someone else is doing better? Is there any evidence that somehow we have been dropped into a zero sum economy where these rich guys salaries come out of my pocket?

Whenever I see articles like this, about "share" of total income, it brings to mind this sort of cargo cult view of income, that income is this fountain that bubbles up in the middle of the land, and the rich are just those piggy guys up front who take more than their fair share from the fountain. Of course, we are not cargo cult tribalists, so we understand that income does to spring form the ground, but is actually created by individuals. Don't we?

By the way, hasn't this measure of "gross personal income" been shown to be deeply flawed anyway as a metric over time. In past periods, the rich owned C corps whose profits were generally retained in the corp. for tax reasons and didn't show up in their person income. The shift to S corps and LLCs puts the same profits in the gross personal income line, so that in effect one is comparing apples to oranges.

Posted by: coyote on June 10, 2007 at 11:15 PM | PERMALINK

One of the things that gets overlooked, or at least not mentioned, when discussing top marginal rates is that they used to start at much higher real dollar incomes.

When the top tax bracket was 70% in 1980, a joint filer didn't reach that bracket until $200,000 which would be approximately $460,000 today. When the 70% at $200,000 bracket was first implemented in 1965 that was the equivalent of about $1,200,000 today.

Prior to that the top tax bracket was in the neighborhood of 90% but only applied to family income over $400,000, which would be worth $2.5 million to over $3 million today.

During both periods, credits, statutory limits on the effective rates and wartime surcharges meant that the actual top rate was at times higher or lower than the nominal rate.

The optimal top rate and the point at which it should apply are both legitimate topics of debate, but I honestly don't see why a top rate of around 70% should be off the table if the income floor for that rate was in the range 1-5 million dollars.

Posted by: tanstaafl on June 10, 2007 at 11:24 PM | PERMALINK

coyote, you should care because concentration of wealth and income both are not good for democracy.

in a sense, even more to the point, i have no difficulty with people who earned their money fair and square. the problem is, lots of people aren't earning their money "fair and square," they're earning it via insider trading, phony bookkeeping, insider circles setting comp levels, and similar matters, which is to say that what we should expect to see in something like CEO compensation is a bell-shaped curve of distribution and what we actually see is a compression at one end.

and to make a long story short, no, we can correct for the effects you're talking about in your last paragraph: the gold standard for looking at the upper 1% (as referenced in the article kevin quotes) is the work of piketty and saez. do some googling and you'll discover that they've looked at that question (and every other question that apologists for the notion that the current distribution of income is that naturral order of things has thrown their way). there was, for example, an exceedingly lengthy back-and-forth at the economist's view blog on this matter that you can read if you want to learn.

Posted by: howard on June 10, 2007 at 11:24 PM | PERMALINK

egbert proves, if proof were needed, that conservatarian water-carriers can't do simple arithmetic, and shouldn't be trusted around an economy.

Posted by: craigie on June 10, 2007 at 11:25 PM | PERMALINK

Coyote, to a certain extent it is a zero-sum game.

For most of the period when the top 1% has been gathering a greater and greater share of the total income, the median income has been stagnant despite huge increases in productivity and per-capita GDP.

Posted by: tanstaafl on June 10, 2007 at 11:30 PM | PERMALINK

>I'm confused, remind me again. Why should I care? I am either doing fine or not -- what does it matter that someone else is doing better?

Because wealth is power.

Everyone above about a $10k/person/annum income has all of their physical needs met. The marginal utility of consumption declines pretty fast after that.

But further wealth translates to status and control. It's why people fight for it. The consumer goods and trinkets are for the most part just displays of that, and the means to insulate one's self from other strata of society.

>but is actually created by individuals. Don't we?

Yes. But do you actually believe that the per-person productivity of executives has more than doubled in comparison to, say, engineers or doctors in the last decade?

Whether "I'm doing fine or not" right now is not the concern. What does concern me, is that many in the upper-end of the wealth spectrum are trying to pull away from the middle class, physically and emotionally, and working to get an upper hand in financial control over society. Not all of them, as could be seen from the fight over the estate tax in the states, but most.

There obviously is a return to class warfare going on, and it's not been started by the middle class.

My own theory is that the rise of nascent superpowers in asia, and competition for limited resources, means that north america and europe will be in a future where we won't be running the world anymore, and growth rates will permanently slow. For the oligarchy, that means to keep in a comparable position vs their peers in the new superpowers, they have to cut themselves free of the bulk of society.

That requires a bimodal power and wealth distribution like brazil, not an assymetric bell curve as we have now.

Posted by: Bruce the Canuck on June 10, 2007 at 11:39 PM | PERMALINK

....It is commonplace to hear that the current set of arrangements and policies is the only possible way the economy can work, given trends like the rise of China and global economic integration. As Professor Levy said, "That's a very convenient argument for people to make if they're doing very well."

But is the argument false? Put differently, what are the counterarguments and contrary facts?

from the original:

But as companies and compensation consultants began using information technology to determine more accurately the contributions of individual employees, employers began to discriminate among employees based on performance. In a working paper, Professor MacLeod, along with Thomas Lemieux of the University of British Columbia and Daniel Parent of McGill University, mined census data and found that the proportion of jobs with a performance-pay component rose to 40 percent in the 1990s from 30 percent in the late 1970s.
&&&
“Since companies are better able to measure precisely what an employee contributes, we’ve seen a greater range of incomes among people doing roughly the same jobs,” Professor MacLeod said.
&&&
The fact that more Americans are paid less on the basis of a job title and more on their individual output inexorably leads to greater inequality. The authors’ conclusion is that the rise of performance-based pay has accounted for 25 percent of the growth in wage inequality among male workers from 1976 to 1993.

Is this false? What accounts for the other 75%?

Posted by: MatthewRmarler on June 11, 2007 at 12:07 AM | PERMALINK

"...My own theory is that the rise of nascent superpowers in asia, and competition for limited resources, means that north america and europe will be in a future where we won't be running the world anymore, and growth rates will permanently slow. For the oligarchy, that means to keep in a comparable position vs their peers in the new superpowers, they have to cut themselves free of the bulk of society.

That requires a bimodal power and wealth distribution like brazil, not an assymetric bell curve as we have now."
Posted by: Bruce the Canuck on June 10, 2007 at 11:39 PM

The Asian economies are growing at double-digits primarily due to our consumer spending. When that spending goes into free-fall, because of the middle class being tapped and hollowed out, that global economic conveyor belt will come to a halt. Has China ever experienced a truly deep recession yet? It makes me wonder if the domestic "oligarchs" think China has a superior model because democracy is lacking? I suspect these people are going to be in for an unpleasant surprise when the Chinese recession hits just as the foreign policy neoconservatives were taken surprise by Iraq.

Posted by: Doc at the Radar Station on June 11, 2007 at 1:09 AM | PERMALINK

wapo op-ed 10/30/06

Consider the evidence of rising income inequality in the United States. In a path-breaking recent paper, "The Evolution of Top Incomes: A Historical and International Perspective," Thomas Piketty of ecoles Normales Suprieure in Paris and Emmanuel Saez of the University of California at Berkeley have shown that the share of national income held by the richest 1 percent of Americans -- stable at about 32 percent throughout the middle decades of the 20th century -- began to rise sharply in the late 1970s and by 2002 had surpassed 40 percent. In the past few years, most income gains have gone to people at the very top of the income ladder, with middle-class Americans seeing only a small boost in their economic standing.

Posted by: more info on June 11, 2007 at 7:22 AM | PERMALINK

What they'll probably find out is that the other executives aren't being paid enough.

Posted by: jhm on June 11, 2007 at 9:11 AM | PERMALINK

Bill Richardson says he would leave no troops in Iraq and I believe he is correct but at the same time Ole Flip-Flopper Joe Lieberman wants to attack Iran and that folks is the difference between a Democrat and a Republican.

Posted by: Al on June 11, 2007 at 9:42 AM | PERMALINK

Kevin,

If you are correct that CEOs in public companies are overpaid, then you have to explain why private equity pays CEOs even more. It can't be that CEOs in companies controlled by hedge funds and private equity have greater power over the Board than do CEOs in public companies. In fact, it's just the reverse. So why do the rich guys who own the private companies throw their own money away on CEOs?

If you can't explain this, then I would respectfully suggest you go back to the drawing board and rethink your premise that public company CEOs are overpaid.

Posted by: DBL on June 11, 2007 at 9:57 AM | PERMALINK

DBL, the private equity guys are paying the CEO to extract the wealth of a public corporation their behalf. next question?

Posted by: howard on June 11, 2007 at 10:06 AM | PERMALINK

DBL:
I suppose you're going to provide some evidence for this assertion?

If you are correct that CEOs in public companies are overpaid, then you have to explain why private equity pays CEOs even more

Or this?
It can't be that CEOs in companies controlled by hedge funds and private equity have greater power over the Board than do CEOs in public companies.

Really? Why the fsck not?
Privately held companies have no disclosure requirements when compared to publicly held ones. Friends and relatives are all perfectly fine to have on boards and in executive offices - conflict of interest laws are inapplicable until someone complains - and who would, in the scratching-each-others-backs world they inhabit?

Posted by: kenga on June 11, 2007 at 10:08 AM | PERMALINK

the childishness of the likes of mhr is sometime beyond comprehension. it's as if they can only understand two choices at a time: the status quo in america precisely as is and a fantasy version of Cuba and the USSR.

presumably, mhr would have sided with the brits in the revolutionary war....

Posted by: howard on June 11, 2007 at 11:13 AM | PERMALINK

And dumbass George Will has a piece in the Washington Post the same day saying "income inequality? what income inequality?"

Posted by: Jenna's Bush on June 11, 2007 at 1:00 PM | PERMALINK

Thank goodness we have the AFL-CIO

I'm guessing that's an ironic entry as well.

Posted by: Vicente Fox on June 11, 2007 at 1:26 PM | PERMALINK
Is this false?

Uh, yeah, its false. wages in general have been stagnant while returns on capital have eaten up all the wealth generated by the decent (in aggregate terms) economic performance. The increasing inequality in income is almost entirely between labor and capital, not among laborers, and particularly not among laborers with similar job titles, so the whole "income inequality is driven by more detailed performance based pay replacing people being paid by their job title" is so transparently false as to be amusing.

Posted by: cmdicely on June 11, 2007 at 1:31 PM | PERMALINK
Vincent, the situation during the '90s is a little complicated (and again, as i noted, i don't have access to all my bookmarks right now): on the one hand, income to the upper 1% did increase; on the other hand, real incomes went up across all levels of household.

Increases in income are a source of utility for those that experience them; increases in inequality are a source of disutility for those on the losing side. A good case can therefore be made, I think, that a certain degree of increased inequality is acceptable when the incomes are for the most part rising across the board.

OTOH, when you've got stagnant or falling incomes across much of the distribution and increasing inequality, that's a problem.

Posted by: cmdicely on June 11, 2007 at 1:45 PM | PERMALINK

Kenga and Howard:

I'm happy to try to answer your questions.

First, as I understand it, the alleged problem with overpaid public company CEOs is that they are abusing their power over the Board of Directors to, in effect, steal money from the owners, the stockholders. This is the complaint that is offered in support of rules givng stockholders the right to know more about and even vote on CEO compensation.

However, in most private companies - at least the ones that have been taken private by private equity or hedge funds (versus the founder-controlled ones like Koch Corporation), a small group of very rich people pool their money to buy a company and then go out and hire a CEO to make them even richer. I believe that in many cases, these owners offer very rich salary packages to get the CEOs whom they think will make them fabulously wealthy. If that's so, what's wrong with public companies doing the same thing?

If you wanted to argue that private company compensation is more closely tied to the success of the company, i.e., to equity value, I wouldn't disagree - but when public companies do that, i.e., when they compansate their executives in stock options that pay off only when the stockholders also get rich, you all seem to get really pissed off.

Actually, what I think really bothers you is that CEOs are paid so much more than the average worker. I don't think you really care very much about corporate governance or stockholder rights at all - those are just convenient drums to beat as part of your campaign against income inequality. Why don't you just say so?

One last point on distribution of income. It's worth noting that the share of income that goes to labor v. capital has hardly changed over the last 40 years. So it's not that the capitalist pigs are oppressing the workers of the world. It's that some of the workers - the CEOs, the professional athletes, the entertainers, the hedge fund managers, the trial lawyers, et al. - are getting a higher percentage of the slice of the national income that's goes to labor. This is one reason that attempts to strengthen unions are likely to be ineffectual - having a union does little to change how income is distributed among various workers (executives, middle management, line workers) and it's hard to see how it will change the overall share of income going to labor v. capital, which seems pretty resilient to changes in the economy and the workforce.

Posted by: DBL on June 11, 2007 at 1:46 PM | PERMALINK

DBL: So why do the rich guys who own the private companies throw their own money away on CEOs?

They don't. There are major differences in management compensation between public and private companies (the cite in my post of June 10 2:11PM addresses exactly that question); among others:

  • Management has a significant equity stake from the start; you don't get to issue/exercise options at your convenience.
  • Management shares the same risk; payout (or not) comes when the company is sold.
  • No golden parachutes; if you're fired at you'll walk away with (maybe) 1-3x annual salary at best.
Why would management choose that path? Primarily because the upside is much greater.

In short, deliver and you get paid--and paid more than you would at a public company. And unlike public companies there's a very precise definition of what it means to deliver.

Posted by: has407 on June 11, 2007 at 1:52 PM | PERMALINK

has407: Precisely. Well said. But if public companies offered the exact same type of compensation to their CEOs, do you think that would mollify those who are currently attacking CEO pay? I don't, because I don't think the attack has anything to do with corporate governance.

Posted by: DBL on June 11, 2007 at 2:05 PM | PERMALINK

DBL, you should try not to "guess" what is "really" pissing me off, since you have no way of knowing.

for example, what "really" pisses me off about CEO compensation at public corporations is that it has nothing to do with supply and demand: CEO comp is set by a comp committee of the board, and they rely upon "comp consultants" to tell them what other CEOs are making; in addition, there are many interconnecting circles of relationships in boards and comp committees (often including CEOs of other corporations who want to be sure that CEO pay packets keep going up), which call the judgement of said committees into question.

what "really" pisses me off about the private equity guys is that they don't add value, they extract it. they take a company private (generally at a low-ball price), they leverage it up with debt, and then they return to the public markets, having pocketed the equity that should have belonged to shareholders. They pay huge sums to CEOs because the CEOs have what amounts to "insider" knowledge on how best to extract that value.

on the other hand, when a musician or an actor or a writer or an athlete or a true entrepreneur makes huge sums, i have no problem at all.

finally, i have no idea why you think that the distribution between labor and capital hasn't changed in a long time. We have had record profits for a few years now; profits belong to capital, not to labor. it's not all that relevant to the underlying question of CEO pay (other than i have no problem rewarding CEOs who produce record profits), but still.

Posted by: howard on June 11, 2007 at 2:30 PM | PERMALINK
It's worth noting that the share of income that goes to labor v. capital has hardly changed over the last 40 years.

That might be worth noting if there was any evidence that it was actually true.

Posted by: cmdicely on June 11, 2007 at 2:45 PM | PERMALINK

DBL -- I don't think it would mollify those who attack CEO pay based simply on size of the paychecks. It think it would mollify those who attack CEO pay based on the disconnect between performance and pay.

That said, trying to mimic the private equity compensation model in a public company would be difficult at best, as private equity operates on well-defined and bounded criteria and events: buy for $X; execute the plan; sell for $Y and cash out.

However (and ironically) we might see some tempering of public company compensation based on what's happening in private equity. I think you'll see more questioning of generous compensation guarantees in public companies--guarantees that have in the past been deemed necessary to attract top talent (*cough*)--and which have tended to decouple performance and pay.

Posted by: has407 on June 11, 2007 at 2:47 PM | PERMALINK

Has407 - You might be right, but my guess is that if even a couple of public company CEOs were to make hundreds of millions of dollars on private-equity type pay-for-performance deals, the cries of distress from these precincts would be defeaning.

cm- According to one paper that I found from Northwestern, the share of national income going to labor increased slightly from 1929 to 2004. http://www.faculty.econ.northwestern.edu/faculty/christiano/362/w2006/lect1.pdf. The professor said that "[g]iven the crude nature of these calculations, perhaps it is safest to conclude that this evidence suggests there has been little, if any, change."

The interesting question is why have the top performers (in all fields - not just management, but entertainment, sports, the professions, etc.) been able to garner an increasing share of the labor portion of income. Kevin has posted on this subject before, but there does not appear to be any kind of widely held consensus on the causes of this phenomenon.

Posted by: DBL on June 11, 2007 at 3:35 PM | PERMALINK
cm- According to one paper that I found from Northwestern, the share of national income going to labor increased slightly from 1929 to 2004.

And how does that say anything about the changes in the last 40 years, without using the fallacy of division?

According to this from the St. Louis Fed, labor share fell significantly from 1970 to 2004, unless you count the employer side of Reagan's increase in payroll taxes to subsidize the general fund deficit as "increased compensation" to labor, in which case the share is about constant.

Of course, that only covers share of pre-tax income; as the favorable treatment of capital income in taxation has increased over the intervening period (especially if you count the employer share of increased payroll taxes as income to labor that is then entirely eaten up by taxes), the post-tax is going to be more skewed toward capital no matter which way you look at it.

The interesting question is why have the top performers (in all fields - not just management, but entertainment, sports, the professions, etc.) been able to garner an increasing share of the labor portion of income.

I don't see why that would be an interesting question even were it established as true across the board. It's sort of an obvious and expected trend if ability to identify performers improves over time, as one would expect it would.


Posted by: cmdicely on June 11, 2007 at 4:41 PM | PERMALINK

DBL -- The capital-labor share is pretty sensitive to the starting year; e.g., over the last 25 years (1980-2005) capital's share increased about 5%, declined from the 50's into 70's, and has increased since.

In any case, as you suggest, those changes do not adequately explain the income shifts. That is partially addressed by Levy and Temin in Inequality and Institutions in 20th Century America. A related freely available paper (the research of which is used by Levy and Temin) and was pretty ground-breaking is Where Did the Productivity Growth Go?, Ian Dew-Becker and Robert J. Gordon, Brookings 2005.

In short, Dew-Becker and Gordon answered the question of where the money went; Levy and Temin attempt to answer why it went there. As you say, there isn't consensus, but the Levy and Temin paper is enlightening.

Posted by: has407 on June 11, 2007 at 4:53 PM | PERMALINK

The interesting question is why have the top performers (in all fields - not just management, but entertainment, sports, the professions, etc.) been able to garner an increasing share of the labor portion of income. Kevin has posted on this subject before, but there does not appear to be any kind of widely held consensus on the causes of this phenomenon.
Posted by: DBL on June 11, 2007 at 3:35 PM

DBL, See:
Flat Maxima Solved!
http://www2.washingtonmonthly.com/mt/mt-comments.cgi?entry_id=11046
Study: "The Loser's Curse: Overconfidence vs. Market Efficiency in the National Football League Draft"
http://faculty.fuqua.duke.edu/~cadem/bio/massey%20&%20thaler%20-%20loser's%20curse.pdf

The reason is behavioral. We (humans) tend to overvalue choice and to overbid for top talent at the expense of market efficiency.

Posted by: Doc at the Radar Station on June 12, 2007 at 8:19 AM | PERMALINK




 

 

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